Wednesday, December 21, 2011

Policy uncertainty and jobs: A Keynesian consensus

Recent research has estimated that policy uncertainty is a significant factor in holding back employers from hiring. Massive and unknown changes in the regulation of health care, the financial sector, energy, and the environment are expected to increase the costs of doing business and employing workers. In addition, continued wrangling over temporary payroll tax cuts and permanent income tax increases mean that firms don't even know what taxes they will be paying in January.

These new regulations and taxes will impose higher costs on businesses and would, therefore, have impacts even if their details were set in stone. But the rules for health and financial reform, for example, are still far from final, and there are signals of all sorts of potential energy and environmental rules in the future. This policy uncertainty leads to an addditional difficulty for employers because they cannot even do the calculations to determine their plans for the future. John Stossel puts a human face on the difficulties that businesses face when dealing with such massive uncertainty.

Independent of the worthiness of the policies and regulations themselves, it is simply a terrible idea to impose them during (or in the wake of) the biggest economic downturn since the Great Depression. This is not a conservative notion in the least: Lord Keynes himself recognized it. In effect, Keynes might say that the positive effects of the President's massive economic stimulus might have been canceled out by his new regulations and the policy uncertainty that he presides over.

A non-Keynesian would agree wholeheartedly with the effect of new regulations and policy uncertainty. but would have serious doubts about the efficacy of government spending in stimulating the economy. So, go ahead with the partisan wrangling over the proper role of government and the stimulative effects of government spending. But honest people on both sides should agree that new regulations and policy uncertainty are responible in part for our tepid recovery.